Senators defend hold harmless elimination

Ready to dodge verbal bullets from a room full of county and municipal officials, two New Mexico legislators who worked on a tax reform bill earlier this year that will cut tax revenues for many communities, pleaded their case during the Mayors' Summit Meeting Thursday in Ruidoso.

The tax reform bill passed by the Legislature included a provision that will phase out a "hold harmless" gross receipt tax payment put in place to reimburse towns for lost revenue when the tax was removed from groceries and prescription drugs during the administration of former Gov. Bill Richardson.

Ruidoso Village Manager Debi Lee has estimated the elimination of hold harmless would cost the village more than $600,000 annually. However, the village's current population falls under the 10,000-person threshold for the cut and Ruidoso has the option of either continuing to receive the make-up check or to impose an alternate GRT in 1/8th of a cent increments up to 3/8ths of a cent.

State Sen. John Arthur Smith, a Democrat from Deming, said the provision also carries a two-year implementation delay during which communities can prepare for the change and then a 15-year phase-in period.

Moderator Hubert Quintana, executive director of the Southeastern New Mexico Economic Development District/Council of Governments, called Smith and State Sen. Stuart Ingle, a Republican from Portales and Senate minority leader, "brave" for facing an audience of people who opposed the bill.

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The district brought municipal and county leaders from the region together for the summit.

"I know many of you are not happy, but once you hear why it happened and that it probably was a good time for it happen, you probably will understand better," Quintana said. "It may not be something you wanted to see happen, but it does not affect communities of less than 10,000 and most of the towns in southeastern New Mexico fall within that category. Please don't throw anything at (the senators)."

Some history

"Long before Senator Ingle and myself hit the New Mexico State Legislature, we had in the state some brilliant minds when it came to tax policy issues," said Smith, who is chairman of the Senate Finance Committee and one of the chief drafters of the legislation. "The idea behind those minds was to make certain we had a low rate and a very, very broad base. That's how we got to where we were taxing gross receipts on services, goods, virtually everything that moved. In those days, we had maybe a 400,000 or 500,000 population. Today it's about 2 million, still by most standards not a lot of people."

Smith said he and some other legislators were cautioning about a downturn in the economy as early as 2006. "Obviously, it fell on deaf ears," he said. "The bottom line was we were turning deep, deep into a recession. People are saying we haven't come out of it in New Mexico. Well, we were nine months late gong into it. But we encountered some politicians, who only delivered what was extremely popular. They said of the food tax, 'My god. We can't tax poor people.' We provided a low income tax credit to offset that, but most people don't even talk about that issue. The bottom line was that it was a war cry that went up and was very popular."

The opposition

"Senator Ingle and myself were part of the opposition from day one, recognizing we were, in fact, narrowing our base instead of broadening," Smith said. "To make it revenue neutral, which was erroneous, the suggestion was by the administration we allow an increase of gross receipts on everything else. That forecast was even wrong to the tune of about $37 million. Thank goodness for oil and gas. They covered that sin."

About five years ago, he began introducing legislation to eliminate the hold harmless, "because it was causing the state to pay out $13 million a year above what was forecast. It grew from $37 million to $150 million this year. If left in place for another 15 years, we would be looking at $400 million out of our general fund," Smith said. "It became so expensive, it was not a sustainable course and in the meantime, natural gas prices went from $10 (per thousand cubic feet) to $3.50 mcf, which cost the state close to $1 billion in revenue that had to be taken from education and healthcare. It was not good tax policy.

"We've got 15 years to make that adjustment. About 12 counties will be impacted, any with 48,000 or fewer (people) will not. About 20 municipal governments will be. If they have 10,000 or less (population), they will not. They will still receive the hold harmless."

The bill also included the closure of four tax loopholes, designed to the stop the hemorrhaging of about $200 million annually by the state, he said.

The state has to come up with its own solutions, he said. "The fact is we as a nation have spent more money then we have," Smith said. "We're only kidding ourselves if think somewhere along the way the federal government is going to be able to hold us harmless with defense spending in the state."

Smith said many large corporations "brought us to the dance, but many tax breaks are directed not at them, but to those that might be coming to state. This is the closest thing we've had to a tax overhaul. The future will tell the truth," he said of the bill that was a bipartisan effort.

Ingle, who joined the Legislature 25 years ago, said the bill also was to result in clearer definitions of what should and should not be taxed as food, but still is murky.

"Six doughnuts are not food, seven is," he said. "One Coke is not food, a six pack is. Ice is food." Convenience stores began carrying lettuce and avocados to classify as grocery stores, he said.

Local input

Susie Galea, mayor of Alamogordo, said the loss of the hold harmless payment cold turkey would cost her city $2.5 million and she's grateful for the two-year grace period. She asked the senators to push for tort reform as something that would help her community and the state.

Ingle said both senators support tort reform, but are in the minority in the Legislature.

Ruidoso Councilor Joseph Eby said although Ruidoso's current population is less than 10,000, the town may eclipse that mark before the 15-year period expires. Ingle said the population figure won't be changed until the next census in 2020. The two-year grace period begins on July 1, Smith said, not when the population mark is achieved. Ruidoso would be subject to the hold harmless withdrawal when the mark is reached, but Smith said with the water shortages in the state, he wouldn't count of the type of growth that demographers previously were predicting. The tax revenue on other items also probably will increase steadily, making up some of the difference.

Eunice Mayor Matt White told the senators they should review and eliminate some of the 4,500 tax credits in the state that cost $2 billion a year in revenue.

"We certainly have a lot of them," Ingle said. "There's a tremendous amount of stuff out there we're going to look at." More accurate projections of revenues would help legislators in weighing the factors of change, he added.

Smith said legislators have been attaching sunset clauses to new tax credits, but "unfortunately, we can't get information about the benefit to the tax paying public. Tax policy is a moving target and high on my radar screen."